Brady Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended July 31, 2015. Brady manufactures identification solutions and workplace safety products. Its two reportable segments are Identification Solutions (IDS) and Workplace Safety (WPS). The Die-Cut divestiture was completed in the first quarter of FY2015; its results are reported as discontinued operations.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $1,171.7 million | $1,225.0 million |
| Gross margin | $558.4 million; 47.7% of sales | $609.6 million; 49.8% of sales |
| Operating income (loss) | $35.3 million; 3.0% of sales | $(41.2) million; (3.4)% of sales |
| Continuing-operations earnings (loss) | $4.9 million | $(48.1) million |
| Net earnings (loss) | $3.0 million | $(46.0) million |
| Operating cash flow | $93.3 million | $93.4 million |
| Capital expenditures | $26.7 million | $43.4 million |
| Cash and cash equivalents at year-end | $114.5 million | $81.8 million |
| Total debt | $253.7 million | $263.2 million |
- Sales fell 4.4%: organic growth of 1.0% was more than offset by a 5.4% adverse currency impact. IDS organic sales grew 1.7%; WPS organic sales declined 0.4%.
- Segment profit declined to $206.3 million from $242.4 million. IDS segment profit fell 14.9% to $149.8 million, and WPS segment profit fell 14.7% to $56.5 million.
- Reported operating results included $46.9 million of impairment charges and $16.8 million of restructuring charges. Excluding those charges, management reported operating income of $99.0 million, versus $122.4 million in FY2014 excluding that year’s impairment and restructuring charges.
- FY2015 diluted earnings per Class A share were $0.10 from continuing operations and $0.06 overall. The effective tax rate was 80.4%, significantly affected by nondeductible impairment charges and other tax adjustments.
Material changes and unusual items
- Gross margin declined amid facility-consolidation costs and inefficiencies, including duplicate labor and facility expense, higher freight, excess inventory and scrap. Management said these disruptions could continue, to a lesser extent, into FY2016.
- The company recorded $37.1 million of goodwill impairment, primarily in WPS Americas and WPS APAC, and $9.8 million of other long-lived-asset impairment. The WPS APAC reporting unit’s goodwill was fully impaired. Total assets also declined year over year, including from currency translation and impairment.
- The stronger U.S. dollar reduced sales by 5.4%; foreign currency translation reduced cash by $14.2 million and contributed to a $120.3 million unfavorable currency translation adjustment in equity.
- FY2015 net cash from operations was broadly flat year over year. Cash from investing activities was a $14.4 million use, including $26.7 million of capital expenditures and $6.1 million of net proceeds from the final Die-Cut sale. Financing cash use was $32.2 million.
Liquidity, debt and capital allocation
- Debt was $253.7 million, including $102.0 million outstanding on the revolving credit facility and $10.4 million on China credit lines. The company had $194.7 million available under its revolver, subject to facility terms.
- Brady reported compliance with debt covenants at year-end: debt-to-EBITDA of 2.0 to 1.0 and interest coverage of 11.8 to 1.0. Approximately 84% of cash was held outside the United States; future U.S. cash needs could require repatriation and potentially incur tax charges.
- Management said operating cash flow and borrowing capacity were sufficient for anticipated working capital, capital expenditures, scheduled debt repayments, dividends and repurchases over the next 12 months. The company paid $41.0 million in dividends and made no share repurchases in FY2015.
Outlook, management commentary and risks
- No specific FY2016 revenue or earnings guidance is provided. Management’s priorities include operational improvement, customer service, product innovation, investment in R&D and digital capabilities, and growth in selected markets.
- Management said WPS sales declines had slowed over recent years and cited digital investment, broader offerings, pricing capabilities and focus on safety-critical industries as elements of its strategy. It cautioned that competition and pricing pressure may prevent a durable return to historical sales and profitability.
- Key risks include continued WPS weakness, execution and customer-service disruption from facility consolidations, failure of new products or digital initiatives, currency and international-market exposure, further goodwill or intangible-asset impairment, tax uncertainty, cybersecurity threats, and covenant compliance.
- Other relevant facts: the board authorized repurchases of up to 2 million Class A shares, inclusive of the existing authorization, and raised the annual Class A dividend to $0.81 after year-end. The filing reports no material pending legal proceedings and no material off-balance-sheet arrangements. The public Class A shares are nonvoting; voting control is concentrated in family-held Class B shares.
Most important facts for investors to verify
- Whether WPS can stabilize organic sales and profit, especially in the Americas and Australia, and whether digital sales can offset catalog declines.
- Whether facility-consolidation inefficiencies and customer-service disruptions abate as management expects, and whether projected long-term savings materialize.
- Whether FY2015 impairment assumptions remain supportable and whether additional impairment indicators emerge, particularly for remaining goodwill and intangible assets.
- How currency movements, foreign-held cash and any future repatriation affect reported results, liquidity and taxes.
- Debt repayment and refinancing needs, available revolver capacity, covenant headroom, and the sustainability of dividends and authorized repurchases.
- The reported fourth-quarter FY2015 continuing-operations loss of $39.4 million, which included the full-year impairment charges recorded in that quarter.